Creating Your Exit Strategy

How to build a valuable business you can sell at a premium

business exit exit planning Oct 30, 2020

If you want your business to take care of you financially forever, you’re going to need an exit strategy in place.

But growing and scaling a business is so all-consuming, we often don’t think about building an asset that’s valuable to investors until it’s too late and you're... 

Feeling frustrated and trapped in your business after years spent burning the candle at both ends. 

Wanting to retire with financial freedom or move onto another more exciting project.

Or you just want to cash in on the years of blood, sweat, and tears you’ve put into growing your business into what it is today. 

And you wish you'd thought about your exit strategy at the beginning of your entrepreneurial journey.

What is an exit strategy?

One thing is certain: we all exit our businesses. You could sell for a healthy profit, end up having to shut up shop... or worse, get carried out toe-first in a wooden box. 

An exit strategy helps you leave your business on your terms – for an amount you’re happy with. 

It’s a formal plan that sets out exactly how you’re going to reduce or liquidate your stake in your business. 

Right now, it may be hard to imagine selling your business, but there has never been a better time to turn it into a valuable asset that you could sell.

So, regardless of where you are along your entrepreneurial journey, if you want to get the most value out of your business, then this guide is for you.

No one finds themselves at the top of Everest without a plan for getting there. 

In the same way, don’t bet on leaving your business with the amount you’d like in your bank account without an exit strategy in place.

The biggest mistake entrepreneurs make when it comes exit planning 

Most entrepreneurs start thinking about their exit strategy far too late.

They only consider selling their business once they’ve reached the end of their tether after years of frustration and resentment – when they’re feeling trapped and burnt out.

This happened to me, and I’d just had… enough.

If that’s where you find yourself now, I’m going to save you some heartache from hard-earned personal experience. 

If you talk to a buyer, a business broker or M&A advisor without having your house in order, you’re more than likely going to get a nasty surprise when you hear what they think your business worth

My cautionary tale…

No one wants to hear that their baby is ugly. 

But that’s exactly what I discovered when I took the first steps towards selling my business some years ago. 

I received an offer, but it was an earnout deal that hinged on me staying on and running the business for another five years… and achieving certain growth targets. 

I was at the point that a lot of entrepreneurs are when they decide to sell their business – frustrated, burnt out and wanting out. Put another way, I’d fallen out of love with my business.

All I wanted to do was hand over the keys to the castle for the right offer and ride off into the sunset.

But I had no exit plan...

  • I was the hub of the business – every decision went through me. 
  • I was running the business like my personal ATM, not a valuable asset.
  • I was frustrated by my team and resentful of my business.
  • And I was so personally involved in the operations of the company, it couldn’t run without me.

What I did have was a valuable recurring revenue stream and the makings of a leadership team. 

But from the investor’s point of view, the business wasn’t worth buying if I wasn’t going to be staying on at the helm. 

This left me with a tough choice: 

Sell my business to someone else, become their employee, and hope I get my earnout after hitting my revenue targets in five years… 

Or go back to the drawing board and rebuild my business into an asset that was going to be much more appealing to investors.

I took the second option – and eventually sold my business for a multi-seven-figure deal without an earnout

The good news for you is that there’s a step-by-step process any entrepreneur can follow to increase the value of their business and exit for a substantial profit. 

I learned it the hard way. I’ve created this guide so you don’t have to.

The biggest secret to a successful exit

If you want to exit your business with the biggest payout possible, you need to look at it through a buyer’s eyes. 

When you sell your business, you’re coming to the end of your journey. 

But it’s the start of the buyer’s. 

So while you’re thinking of taking a well-earned break, spending more time with family and friends, and maybe even buying that expensive new car or sailing around the world... 

The buyer is thinking about everything that might be wrong with your business:

  • Will key staff stay?
  • Are customers loyal to the business or to the seller?
  • Have we missed anything in the due diligence?
  • Will the things we think are really valuable in the business actually be valuable?

Buyers want a healthy, well-managed company. A business that:

Now, there’s no doubt about it – it’s incredibly difficult to take a step back and look at your business objectively. It’s your baby, after all.

However, to a buyer it’s an asset they’re aiming to scale and turn into a profit. 

Before you go to market, you need to become an investor and see your business as an asset.  

The seven steps to turning your business into a valuable asset

The most successful business exits are years in the making. 

If you want to get the biggest return possible on the blood, sweat, and tears you’ve poured into building your business over the years, then you’ll need to follow this eight-step process:

Step 1: Create an exit vision
Step 2: Find out what your business is worth
Step 3: Cultivate a Positive Mindset 
Step 4: Fixing the fundamentals
Step 5: Exponentially increasing the value of your business
Step 6: Executing the perfect exit
Step 7: Filling the void

Step 1: Create an exit vision

Given you’re reading this guide, you’re probably already thinking about this part of the process.

You’re weighing up whether you do want to exit. And if you do, you’re thinking about what you’d like it to look like. 

You’re mulling over questions like:

  • What is my business worth?
  • Who might I sell it to?
  • What do I want the exit to look like?
  • Do I want to cut ties entirely or still be involved in some capacity?

You’re thinking over what your possibilities are – what you can do.

Clarifying your vision

I first learned about the importance of a vision during a Small Giants Passport Event at Zingerman’s in Ann Arbour, Michigan. 

Small Giants’ co-founder Ari Weinzweig had us create a picture of our business three years in the future – and I have him to thank for triggering my own exit process.

I recommend you make the first step on your exit strategy journey creating a vision for the future of your business. 

Start with the end in mind and use some of these questions as prompts to come up with a vision for the future of your business that inspires you:

  • Who do we serve?
  • How do we add value?
  • What are our revenue goals?
  • Who are our dream clients?
  • What are our core values?
  • What does the future hold for my role as CEO and owner?
  • What are my exit options?
  • How much work needs to be done on the business?
  • If I’m going to sell, what's my number?
  • Is it important to me what happens to the company culture I’ve built?
  • Do I want to get out completely and be paid a lump sum and be able to walk away?
  • Do I want to be involved in the business in some form?
  • Am I looking for a private equity injection to help you grow the business even more before I really take it to market?

Get clear on your answers to these key questions and you’ll have more clarity on what you want from your business. 

Not sure what the right step is for you? Read this guide to discover what your options are.

The next step is where you’ll discover how long the road ahead is if you’re hoping for a healthy exit. 

Step 2: Find out what your business is worth

You’re thinking through your options, but there’s only so far you can go until you know the value of your business

And while your business produces annual financial accounts, if it’s like most businesses it isn’t getting audited, which means you’re unlikely to know its real value as an asset

So you need to go to a reputable accounting firm and have your business valued (if not audited). 

A word of warning – brace yourself for a nasty surprise.

If you haven’t been actively working towards an exit, your business isn’t going to be worth what you’re expecting.

For most entrepreneurs, this step serves as a wake-up call for how much work is ahead if you want to increase that number

Step 3: Cultivate a Positive Mindset

Chances are that once you’ve gone through this process, you’ll discover it’s going to take 12 to 36 months of work to turn your business into a really valuable asset

And that's a tough pill to swallow... especially if you’ve reached your wit’s end and you’re looking to sell now.  

Which is why one of the most crucial steps in your business exit planning is to work on cultivating a positive mindset. 

After all, you thought you were coming to the finish line of the marathon that is starting and building a business, only to discover you’re in for a sprint. 

The fact is: if you’re going to turn your business into a valuable asset, you’re going to need to fall back in love with it.

In her book Loving Your Business (which I wish I’d read a couple of decades ago!), Debbie King stresses the one thing they don’t teach you in business school is how to have a great relationship with your business.

I’d previously used systems like Scaling Up, EOS®, The Great Game of Business...

But as Debbie puts it, “Systems are just tools. If your mindset and strategy aren’t aligned, the best systems in the world won’t get you the results you want.”.

If you see your business as something that devours your freedom and leaves you feeling trapped and frustrated, there’s no chance you’ll stay the distance. 

At the moment you might feel like there’s no end in sight – that you’re done with your business. 

But when you combine a well-thought-out exit strategy with a conscious decision to work on your relationship with your business, you’ll start to see light at the end of the tunnel – a vision to work towards.

Step 4: Fixing the fundamentals

Now you need to move on to the work of making your business more valuable. 

There are six fundamentals you need to have in place to maximise the exit value of your business. 

These are the low-hanging fruits of making your company a more attractive asset – the basics any investor will want to see in place before they think about parting with their cash:

Quality financial records and reporting

The average business’s finances are a bit of a mess.

The numbers are everything to potential buyers, so one of the biggest ways to increase the value of your business is to get quality financial records in place. 

In my case, my business had a financial controller that was doing a fine job of pulling together the basic financial stuff and handing that over to our accountants. 

But I realised far too late how much value a CFO who made sure all the financial and fiduciary stuff that investors are going to be looking for were in place.

That ended up being the best hire I ever made. I realised I needed to get my financials in order, and my CFO was integral in helping me do exactly that, adding an incredible amount of value to the business.

Ideally, you want budgets and audited financials that go back three years. This is as concrete as proof gets to a potential acquirer that your business represents a guaranteed return on investment.

An appropriate corporate structure

A lot of us entrepreneurs can make things pretty complicated. 

I was definitely guilty of that: my business consisted of three operating companies with a holding company on top of that. 

As you can imagine, it was all pretty complicated. 

And to a potential buyer, complicated is a big red flag. The last thing they want is to put their capital into something that could have a nasty surprise lurking under a tangled mess of a corporate structure.  

So make sure your corporate structure is simplified and streamlined to make your business as appealing an asset to investors as possible. 

No under-the-counter transactions

It goes without saying, but for your business to be as appealing as possible, everything needs to be done above board.  

That means no under-the-counter transactions or personal expenses made through the company. 

If you’re not sure something you’re currently doing is strictly above board then definitely err on the side of caution and seek out professional legal advice, as you’ll be left kicking yourself if something silly and preventable ends up scuppering a big exit.

Clear legal rights to key business assets

Investors are only going to part with their cash if it's clear they’re receiving legal rights to the key business assets.  

This was another lesson I learned the hard way when the IP for the software my business had developed was held in an off-shore operating company. 

One of the steps I had to go through was making sure everything was as clear and simple as possible when it came to the IP investors were looking to inherit. 

No major known risks

Lastly, investors want to be sure there are no nasty surprises waiting for them, so they’ll want to do their own digging into what’s going on under the hood before they think about making an offer.  

Having your organisation audited every year as part of your financial processes is going to go a long way to speed this part of the process along.  

Also, keeping budgets from the past three years will demonstrate your ability to accurately forecast the future to a buyer – making your projections more believable.

Step 5: Exponentially increasing the value of your business

Fixing the foundations of your business will go a long way to helping you exit for a healthy profit. 

But there’s still plenty more you can do to get the most money possible out of your exit.  

By fixing some of the fundamentals and finding the right strategic buyer, you might sell for 3.7X profit. 

But if you work on the key value drivers that John Warillow refers to in his book Built to Sell, you could drive the revenue multiplier north of 7.1X profit (or EBITA – earnings before interest, taxes, and amortization).

Get these nine pieces of the puzzle in place and you’re guaranteed to exit big:

1. Financial performance

Investors are only buying one thing when they make an acquisition: your future stream of profits. 

Therefore, as an owner, you have two big levers to pull on to drive up the value of your company:

  • How much profit your company will make in the future.
  • How reliable your estimates are (remember the fundamentals on keeping budget records going back three years!).

Ask your accountant or business broker to explain the methodology an acquirer will use to determine what your business is worth. Doing this will help you understand how to start driving up the value of your business today.  

2. A unique value proposition

For your business to be an attractive investment, it needs to offer unique value to its clients or customers. 

Otherwise, there’s no guarantee a competitor isn’t going to set shop in your sector and steal market share from you by undercutting your prices or figuring out how to operate more efficiently. 

So it’s essential that you have a unique value proposition – something another entrepreneur couldn’t simply replicate.  

This might be a unique IP, an incredibly strong brand, or even such a strong stranglehold in a particular niche that it wouldn’t be worth it for anyone to set up a copycat operation.  

If your business doesn’t have a truly unique value proposition it won’t fetch the highest prices when you put it to market. 

3. Strong operating systems

Are there strong systems and processes in place that enable your business to run on autopilot while you’re not around 

Do you have a talented and motivated team that drives the business forward without you needing to supervise them?

If these foundations aren’t in place investors may not be interested. 

4. Recurring revenue

Investors are looking for a sure bet.  

And businesses that generate recurring revenue are as sure as it gets. 

A business model built on recurring revenue will assure potential buyers of future sales, lowering the risk involved for them and therefore increasing the value of your business

One of my previous businesses was valuable because it had an automatically renewing subscription, which raised its value. However, it was over-reliant on a single customer, which in turn brought its value down.

5. Overdependence

A business that relies on just a few customers or employees isn’t going to fetch a high price when it goes to market. It’s just far too much of a risk for investors. 

Buyers look especially closely at customer concentration, which they regard as a key vulnerability. If any one customer makes up more than 15% of your business, they will discount the price accordingly.  

Your goal is to remove the danger of overdependence. If your organisation relies on a few high-paying clients or superstar members of staff to function, make sure you put a plan in place to move away from that. 

6. Owner independence

So many entrepreneurs build their business around themselves.  

Every decision goes through them and they need to sign-off almost every decision. 

Not only is this a surefire to burn yourself out – but it’s also going to severely limit the value of your business. 

An acquirer is looking for a return on their investment. If your business has relied on you up until this point, what guarantee is there that things won’t fall apart without you at the helm?

So if you’re looking to sell up rather than get into an earnout agreement (which I’d strongly recommend against), you’re going to need to remove yourself from the day-to-day operations of your business

7.Growth potential

Buyers want to buy a business that has room for growth.  

Think of it from their point of view: they're looking for a big return on their initial investment, and the most effective way to achieve that is to buy a company with room to grow and then invest in getting it to realise its full potential. 

So they’ll be looking for a business on an upward trajectory in a growing sector with all the foundations I’ve already discussed in place.

8. Cash flow

A healthy cash flow is a surefire sign to an investor that a business is a solid investment opportunity. 

If your current business model doesn’t generate recurring revenue, then it’s well worth figuring out how to transition to a business model that has regular income baked in. 

If your business is built on a subscription model it’s going to be a lot more appealing than one that makes its money through a few big payments throughout the year. 

9. Customer satisfaction 

Last but not least, the most valuable businesses have a long list of satisfied customers. 

You’d be surprised how many companies can’t get a decent case study or testimonial because they’ll hunt down each piece of work and then do a really poor job of executing it. 

Buyers are looking for a company that represents a long-term investment, and its reputation is going to be a key factor in its longevity.

Step 6: Executing the perfect exit

You’ve spent a few years transforming your business into an owner-independent, recurring revenue-generating machine – and you’ve got the financial statements to prove it. 

At this point, your business is going to be worth multitudes of that initial valuation.  

And the best part? When you treat your business like an investment and turn it into an asset other people want to buy, you automatically create a business that can scale and run without taking your time.

A by-product of your hard work is that you now own a business that can run on autopilot

Which means you now have a choice – sell your business for a healthy figure or stay on at the helm of a successful business. 

How much stronger of a position is that than where you started?

If you do choose to exit, then here’s everything you need to know about executing the perfect business exit. 

Step 7: Filling the void

The sale goes through, you exit big, and all your hard work pays off… 

And then what? 

Take it from me – it’s crucial that you have a plan in place for how you’re going to fill the void that’s left once you’re no longer hell-bent on growing and selling your business. 

Otherwise, it’s easy to lose your sense of purpose and even spiral towards an existential crisis. 

And no matter how glad you are to be out, it can still be hard to watch the business you grew from scratch flourish from the sidelines. 

So it’s crucial that you figure out what you’re going to do to fill the void. 

So, there you have it: the step-by-step guide to selling your business for the biggest possible profit. 

It’s far from a quick fix, and it might not be what you want to hear if you’re ready to leave today. 

But it’s a tried-and-tested process that is sure to get you what you think your business is worth

And if you’d like help from someone who's been there and done it all themselves – and coached plenty of other entrepreneurs through the process too – then get in touch and we can talk about my business coaching.


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